Greylisting may cost SA the opportunity to create outsourcing jobs

• INN8’s Gambale sees SA as a prime hub for outsourced-platform services
• STANLIB sees high odds of greylisting; possible hold up by lawmakers
• Foreign investors haven’t yet factored in the full effect of greylisting: Investec

South Africa’s likely greylisting by the Financial Action Task Force (FATF) risks harming the country’s potential as a destination for outsourced financial services such as the local investment-platform industry, according to INN8 Executive Mickey Gambale.

Other financial-services industries could also lose out if South Africa joins a list of 23 nations, including Syria and Haiti, should FATF deem authorities and firms haven’t done enough to combat money laundering and terrorist financing. South Africa has until the end of October to show tangible progress in fighting financial crimes.

“I hope we don't end up being greylisted,” Gambale said. “South Africa should be a prime destination to create platform-outsourced services.”

Low unemployment rates in developed markets coupled with high wage demands and the need to run 24-hour services and support, have contributed toward a push from international firms to diversify their locations with smaller offices around the world. Platforms are a critical cog in the unit trust and retail investment industry, using technology to offer access to a range of funds and other financial products from asset managers through one access point.

Also known as Linked Investment Service Providers (Lisps), the local industry had R1.62 trillion assets under administration at the end of March, according to data compiled by the Association for Savings and Investments South Africa from Lisps that supplied information. Lisps accounted for 27% of new inflows into Collective Investment Schemes in the 12 months through March, when total CIS assets under management amounted to R3.1 trillion.

Platforms provide financial advisers with an easy-to-use interface, data on their clients and funds to invest in, pricing and back-office services, such as real-time regulatory compliance and reconciliation. There are 21 local Lisps registered with ASISA, not all of which disclose their data to the industry body. We have bright, smart cheap labour,” said Gambale. “If you think about what you pay a South African programmer versus what you pay someone in the US or the UK. We speak the same language. We're in the same time zone as the UK.”

Wider economic blow

Being greylisted by the FATF could further erode South Africa’s ability to attract global investment on top of other obstacles such as electricity shortages, inefficient network industries and rising costs, said STANLIB Chief Compliance Officer Njabulo Duma. It will make it harder and costlier to do business overseas, throttle free and fair access to international trade and financial markets and boost the cost of capital.

A study of 89 developing nations by the International Monetary Fund between 2000 and 2017 showed that greylisting cut capital flows by an average of 7.6% of gross domestic product. The study, released in May 2021, pointed out that foreign direct investment inflows drop by about 3.2% of GDP and portfolio inflows by about 3.3% of GDP in the aftermath of a greylisting.

“South Africa attracts an extremely low level of FDI inflow as it is, with the bulk of the activity on its capital account instead consisting of portfolio flows, such as the purchases and sale of bonds and equities,’’ said Investec Chief Economist Annabel Bishop. Portfolio funds are easier to move out of the country than fixed assets.

How local equities, bonds and the rand react to a greylisting will depend on the prevailing level of global risk aversion at the time, she said. “If there is a high degree of risk-off, the impact can be more pronounced versus when financial markets are in a markedly risk-taking mood.”

Since April, she said that financial markets became substantially more risk-averse than in the first quarter of this year.

“Foreigners, in general, have become net sellers of emerging-market portfolio assets, with a high degree of risk factored in, but not yet likely the full effect of a greylisting,” Bishop said.

‘High chance’

There remains a high chance South Africa could end up on the greylist, STANLIB’s Duma said in a webinar titled “Hung out to dry” hosted by INN8. While regulators and officials at the National Treasury, Financial Sector Authority and Prudential Authority have worked hard in an inter-governmental task team, the legislative changes have been constrained by lawmakers, he said.

This does give an impression of South Africa always dragging its feet, as Zuma also had to be threatened with court actions before signing into law the changes to the Financial Intelligence Centre Act in 2017 when South Africa faced a risk of being kicked out of FATF.

FATF wants South Africa to strengthen the legislative environment on politically exposed persons and ultimate beneficial ownership; bolster the capacity of law enforcement agencies; put metrics in place to determine if laws are being enforced, and establish treaties with other countries to recover funds from the proceeds of crime or extradite fugitives.

“It’s disappointing that the timelines are still beyond the end of October,” Duma said. “Law-enforcement agencies are on the record complaining about capacity and budgetary constraints, and still, we are not hearing anything about a recruitment drive to capacitate them.”

It takes, on average, three years to get off the greylist, Duma said.

While South Africa may have created some good faith in accelerating efforts to make the deadline, it’s left to the FATF on how much of that will account for the final determination.

“They have standards and methodologies to do what they do,” he added. “They are always wary of creating precedents that will interfere with their work in future.”